What is Microeconomics the study of individual choice, and how that choice is influenced by economic forces What is Macroeconomics the study of the economy as a whole What is the problems with equal income distribution • it steal from people against their will (taxes) for no intrinsic benefit • provides no incentives for people to work hard and improve their skills • leads to inefficient government policies What the invisible hand is The invisible hand is the price mechanism, the rise and fall of prices that guides our actions in a market. Define market force A market force is an economic force that is given relatively free rein by society to work through the market. What are market forces Market forces ration by changing prices. When there’s a shortage, the price goes up. When there’s a surplus, the price goes down. What decide market forces Social, cultural, and political forces play a major role in deciding whether to let market forces operate What is socialism an economic system based on individuals’ goodwill toward others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce. What is Capitalism An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists. What is Feudalism An economic system in which traditions rule. What is Economic Policy An action (or inaction) taken by government to influence economic actions. Name two economic policies Laissez-faire behavioral economic policy What is Laissez-faire is an economic policy of leaving coordination of individuals’ actions to the market What is behavioral economic policy economic policy based upon models using behavioral economic building blocks that take into account people’s predictable irrational behavior Who determine economic policies? Politicians What three things comprise our market economy Businesses, households, and government What are the three taxes personal income tax, the corporate income tax, the Social Security tax. Three causes of market failures externalities, public goods, imperfect information. what is an entrepreneur An entrepreneur is an individual who sees an opportunity to sell an item at a price higher than the average cost of producing it. What is profit What’s left over from total revenues after all the appropriate costs have been subtracted. That is, Total revenue 2 Total cost. Also, a return on entrepreneurial activity and risk taking. what are monitoring costs Monitoring costs are the costs incurred by the organizer of production in seeing to it that the employees do what they’re supposed to do. What are the different tax structures Income taxes Sales taxes, Property taxes, what is social security a social insurance program that provides financial benefits to the elderly and disabled and to their eligible dependents and/or survivors. What is a Surplus An excess of revenues over payments Substitute A good that can be used in place of another good. What is a Market structure refers to the physical characteristics of the market within which firms interact. what is a monopolistic competition a market structure in which there are many firms selling differentiated products and few barriers to entry oligopoly a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account Perfectly competitive market a market in which economic forces operate unimpeded. Monopoly A market structure in which one firm makes up the entire market. A labor market a factor market in which individuals supply labor services for wages to other individuals and to firms that need (demand) labor services Horizontal Merger The combining of two companies in the same industry Vertical Merger A combination of two companies that are involved in different phases of producing a product Acquisition A transaction in which a company buys another company and the purchaser has the right of direct control over the resulting operation Joint venture A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking what is production The transformation of factors into goods and services. Fixed Costs Costs that are spent and cannot be changed in the period of time under consideration. Variable Costs Costs that change as output changes Economies of scale economies that occur because of increases in the amount of one good a firm is producing. Economies of scope occur when producing different types of goods lowers the cost of each of those goods. A price taker is a firm or individual who takes the price determined by market supply and demand as given Who are price takers. Both buyers and seller Price makers set the price Who are price makers Firms These are Barriers to entry social, political, or economic impediments that prevent firms from entering a market. what is a duopoly an oligopoly with only two firms. Implicit Collusion A type of collusion in which multiple firms make the same pricing decisions even though they have not explicitly consulted with one another. To prove a collusion is Difficult Difficult to prove Monopolistic competition makes collusion difficult to prove Oligopoly makes collusion easier to prove characteristic of informal collusive behavior is that prices tend to be sticky—they don’t change frequently. what is a patent Legal protection of a technological innovation that gives the owner of the patent sole rights to its use and distribution for a limited time. Tariffs taxes governments place on internationally traded goods —generally imports. An embargo is a total restriction on the import or export of a good. The Clayton Antitrust Act is a law that made four specific monopolistic practices illegal when their effect was to lessen competition The Federal Trade Commission Act is a law that made it illegal for firms to use “unfair methods of competition” and to engage in “unfair or deceptive acts or practices,” A public good is a good that is nonexclusive and nonrival. (education, defense, roads, and legal systems) government provided Private good only benefit to the person buying the good private goods you sum demand curves demand curves are sum horizontally; public goods you sum sum demand curves vertically. Antitrust policy is the government’s policy toward the competitive process. Sherman Antitrust Act is a U.S law designed to regulate the competitive process. Price discrimination is selling identical goods to different customers at different prices. Example of Price Discrimination Ex. Movie theaters give discounts to senior citizens and children Ex. Airline Super Saver fares include Saturday-night stay overs. Ex. Automobiles are seldom sold at list price. Law of supply states that quantity supplied is positively related to price, the slope of an equation specifying a supply curve is positive The law of demand states that as price rises, quantity demanded declines Price and quantity are negatively related, so a demand curve has a negative slope. The laws of supply and demand affect relative prices, not nominal prices. are affected Shift factors income or price of another good, shift the entire demand curve. Five important shift factors of aggregate demand foreign income exchange rate fluctuations the distribution of income, expectations, government policies. Anything that changes factor costs will be a shift factor of supply. True What changes shift factors? • Changes in input prices. • Productivity. • Import prices. • Excise and sales taxes. What is a price ceiling is a government-set price below the market equilibrium price. Surplus An excess of revenues over payments. An excess of revenues over payments. Supply Curve A graphical representation of the relationshipbetween price and quantity supplied. Equilibrium A concept in which opposing dynamic forcescancel each other out. Equilibrium Price The price toward which the invisiblehand drives the market. The price toward which the invisiblehand drives the market. Partnership A business with two or more owners. Sole Proprietorship A business that has only one owner A business that has only one owner Business A private producing unit in our society. A private producing unit in our society. Example of opprtunity cost Consumer choice Cost of capitol Production possibilities Define the concept of opportunity costs this concept applies to all aspects of life and is fundamental to understanding how society reacts to scarcity. Is expressed in relative price, the price of one choice is relative to another opportunity costs The law of diminishing control is the observation thatafter a regulation is implemented, as time progresses, itbecomes less and less effective because firms find waysaround the regulations.